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Oana Furtuna

17 November 2021
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 2, 2021
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Abstract
This box establishes stylised facts about the significant increase in initial margin (IM) in the euro area derivatives market during the March 2020 market turmoil. First, it shows that the increase was concentrated almost entirely in centrally cleared derivatives and driven mainly by equity, credit and interest rate portfolios. Second, by comparing static portfolios with those where portfolio repositioning took place, the IM increase is decomposed into (i) changes attributable to the CCP model sensitivity to market volatility, and (ii) changes attributable to portfolio repositioning by investors. For centrally cleared interest rate and credit derivatives (where this method is applicable), CCP model sensitivity to market volatility is found to be a key driver of the IM increase. Overall, the results suggest that it is important to develop a clearer understanding of “excessive procyclicality” for IM and possibly, on the basis of this common understanding, to review the models which CCPs use to calibrate IMs. The supervisory and regulatory framework governing the liquidity management of market participants, and in particular that of some non-bank financial intermediaries, should also be strengthened.
JEL Code
C60 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→General
G10 : Financial Economics→General Financial Markets→General
G13 : Financial Economics→General Financial Markets→Contingent Pricing, Futures Pricing
25 September 2018
WORKING PAPER SERIES - No. 2178
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Abstract
The literature on fiscal multipliers finds that spending-based fiscal consolidations tend to have more benign macro-economic consequences than revenue-based consolidations. By directly comparing expost data with consolidation plans, we present evidence of a systematically weaker follow-up of spending-based consolidation plans. Next, using a newly-developed dataset of consolidation announcements, panel VAR regressions confirm the weaker follow-up of spending-based plans and their more benign macro-economic effects compared to those of revenue-based plans. We disentangle the role of the difference in follow-up from that of the difference in the composition of revenue- and spending-based consolidations. While the latter channel, which works through the difference between revenue and spending multipliers, explains the largest fraction of the difference in economic trajectories, the difference in follow-up plays a non-negligible role as well.
JEL Code
E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
H5 : Public Economics→National Government Expenditures and Related Policies
2 May 2018
WORKING PAPER SERIES - No. 2148
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Abstract
This paper investigates the contribution of private and public channels for consumption risk sharing in the EMU over the period 1999-2015. In particular, we explore the role of financial integration versus international financial assistance for private consumption smoothing in this set of countries. In addition, we present a time-varying test which allows estimating how risk sharing has evolved since the start of the EMU, and in particular during the recent crisis. Our results suggest that, whereas in the early years of the EMU only about 40% of country-specific output shocks were smoothed, in the aftermath of the euro zone’s sovereign debt crisis about 65% of these shocks were absorbed, therefore reducing consumption growth differentials across countries. This progressive improvement of the shock-absorption capacity is due to a higher financial integration, but also to the activation of the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) channelling official loans to distressed euro zone economies. We also show that cross-border holdings of equities and debt seem to be more effective than cross-border bank loans in isolating households from country-specific shocks, therefore contributing to consumption smoothing.
JEL Code
C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G15 : Financial Economics→General Financial Markets→International Financial Markets
24 March 2015
WORKING PAPER SERIES - No. 1770
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Abstract
We explore how fiscal consolidations affect private sector confidence, a possible channel for the fiscal transmission that has received particular attention recently as a result of governments embarking on austerity trajectories in the aftermath of the crisis. Panel regressions based on the action-based datasets of De Vries et al. (2011) and Alesina et al. (2014) show that consolidations, and in particular their unanticipated components affect confidence negatively. The effects are stronger for revenue-based measures and when institutional arrangements, such as fiscal rules, are weak. To obtain a more accurate picture of how consolidations affect confidence, we construct a monthly dataset of consolidation announcements based on the aforementioned datasets, so that we can study the confidence effects in real time using an event study. Consumer confidence falls around announcements of consolidation measures, an effect driven by revenue-based measures. Moreover, the effects are most relevant for European countries with weak institutional arrangements, as measured by the tightness of fiscal rules or budgetary transparency. The effects on producer confidence are generally similar, but weaker than for consumer confidence. Long-term interest rates, as a measure of confidence in the sovereign, tend to fall around spending-based consolidation announcements that take place in slump periods. Overall, if confidence is a concern and consolidation is unavoidable, spending-based measures seem preferable. Slump periods are not necessarily bad moments for such measures, while strengthening institutional arrangements may help in mitigating adverse confidence effects.
JEL Code
H60 : Public Economics→National Budget, Deficit, and Debt→General
H61 : Public Economics→National Budget, Deficit, and Debt→Budget, Budget Systems
H62 : Public Economics→National Budget, Deficit, and Debt→Deficit, Surplus